Navellier: Lock and Load

I specifically saved this optimistic commentary from
Louis Navellier to conclude
this two-part report from The San Francisco Money
Show.It is an exceptionally clear and well
reasoned assessment of the market's prospects, the importance of
dividend tax rate cuts, and the presidential election
cycle.

" What caused the
previous exodus from Wall Street and why has that reversed? The market hit its peak in
March of 2000, but really everything hit the fan in November–the month we couldn’t
pick a president. That was a bad month–one of the worst in history. We might have
been amused by the debacle; it was good TV and interesting to watch. But I can
tell you that foreign investors were not amused. I manage a lot of foreign
money, and I saw that they didn’t like that at all. The dollar got very weak,
and many foreign investors fled. Foreign investors went from 18% of our market
to 6% in several months. They started the massive, relentless exodus out of our
markets. Believe it or not, that election debacle really hurt the market.

"That exodus continued and in July of 2003
over $50 billion left the market. We had what I call a capitulation month. But
then something happened that was good. On July 24th
, a lot of big flagship companies–Coke, Gillette, Proctor & Gamble–came out and
said they were going to buy their stocks back. This was the first bottom. There was
a big wave of corporate buybacks being implemented and this marked the
first low. Eventually, these buybacks ceased, and the market returned to its lows
on October 9th. After bouncing off these lows, the market again set a low in
March 2003, at a time when there was a lot of anxiety over the war in Iraq. So we had a
July 24th low, an October 9th low, and March
10th low. Over this extended period, the market just bumped along the
bottom and outflows ceased.

"Then the market exploded. Why? Because of dividend
relief. This is a huge deal–probably the most bullish event in my lifetime. Over 1,100
companies have initially declared or increased their dividends so far this year. This shows
no sign of stopping and it is having a profound consequence on investing.
Let me give you an example. When a company earns money, it has
to pay Federal taxes and then state taxes. Here in California, you have the
highest corporate taxes in the country. Then if you get a dividend, you have to
pay federal taxes and state taxes. The dividend now has been taxed four times, and
due to California’s high taxes, this could reach 80% taxation. So guess what? Nobody paid any
dividends.

"But this is gone now. Dividends have been
cut to the lowest levels since 1916. And it changes corporate behavior. Today,
if you are a corporate executive and you want to enrich yourself, all you have
to do is declare a dividend. The only trick is that you have to enrich all the
other shareholders along the way. And that is precisely what it was designed to
do. And it’s working. So this has been a big deal. Now we have the lowest dividend taxes
since 1916. Capital gains taxes were also cut, and are now at their lowest rates
since 1933. There has never been a capital gains cut in history that didn’t help
the market. Consumer spending has taken off. And after being dead for three
years, business spending has taken off.

"Based
on the discount model–which compares corporate earnings to Treasury yields–the market was
48% undervalued prior to the dividend relief. Adjusting for cuts in dividend tax
rates, this discount is even greater. That’s why the market has exploded
since April. Investors put $18 billion into the stock market in April via mutual funds, $12
billion in May, $18 billion in June, $21 billion in July, and $20 billion in August. This is
unbelievable and it has me very excited. Money is pouring back into the market
and with record cash still on the sidelines, this can continue to do so for 12
or 18 months.

"There are some other reasons I am excited.
There is an odd anomaly on Wall Street called the Election Cycle. Since 1934,
from the low of the second year of a presidential election term to the high
of the third year, the S&P 500 has bounced, on average, 51%. This suggests
that we have another 18% or 19% to go this year in order to match this average.
Why does this cycle exist? Administrations begin to prime the pump about 18
months ahead of an election. The economy is getting better out there and it will
get better each and every month from now until the election next November. The
third year of a presidential election term is always the best in the stock
market. The second best year in the cycle is the election year itself. Then we
elect somebody, and everything cools off. But that’s another issue….

"For now, I
am very, very excited about stocks. It looks like smooth sailing. We have the
presidential election cycle, a record amount of cash on the sidelines, and I’m
excited that as bond yields go higher it will cause relentless redemption of bonds,
which will lead to more money going into the stock market. The market is
now looking at fundamentals and, as a result, fundamentally-superior stocks are
starting to rule Wall Street. The cream is rising to the top. It’s lock and load
time for growth stocks."